Wednesday, February 11, 2009

1930s: Our Nation's First Stimulus Package

In 1893, there was a depression; we got out of it without a stimulus package. There was a major recession of 1920-21; though sharp, it quickly reversed itself into what has been call the "Roaring Twenties." In 1929, there was an economic downturn, most notably featured by the stock market collapse, after which came massive government intervention -- you might call it the nation's first stimulus package. President Hoover and Congress responded to what might have been a two- or three-year sharp downturn with many of the policies President Obama and Congress are urging today. They raised tariffs, propped up wage rates, bailed out farmers, banks and other businesses, and financed state relief efforts. When Roosevelt came to office, he became even more interventionist than Hoover and presided over protracted depression where the economy didn't fully recover until 1946.

16 Comments:

As a loony leftist, I simply adore the fact that the US right wing wants for the foreseeable future to campaign on the idea that Hoover wasn't laissez faire enough. No fan of the liberal consensus, after the last eight years I'd prefer another fifty years of it to one more day of GOP misrule.

Check the unemployment rate and the GDP growth rate during the depression. During the Hoover administration unemployment rose and GDP crashed.

During FDR's term unemployment was lowered from 25% all the way down to 10% because of his stimulus programs. GDP was also up. Unfortunately, in 1938, fiscal conservatives convinced FDR that the economy had recovered and no further stimulus was needed. The budget was balanced and back down into depression we went.

It was only during WWII, where the idea of a balanced budget became laughable, that the "stimulus package" got big enough to get us out of the Depression.

During the years of WWII the US government ran deficits between 20-30% of GDP for several years. In comparison, this year we might reach a deficit of 15% of GDP.

The massive popularity of Foster & Catchings failure of aggregate demand theory -- embraced in the 1920s by Hoover, Sen. Wagner, FDR, and in various forms by much of the economics profession, which failed almost as one to reveal any flaw in their theory.

"Keynesian economics" is in effect nothing but a Cambridge interpretation of Foster & Catchings.

After Foster & Catchings, "public works" and government spending as a "cure" for the trade cycle was wildly popular among politicians and economists.

Your analysis is simplistic. The measure of whether FDR's and Hoover's programs worked is not whether there was growth, but whether that growth was stronger then it would have been otherwise (compared to the baseline so to speak). Do you think that absent those programs we would have been in a permenant depression? Every other recession/ depression up until that point saw a quick recovery in the few years following. What makes you thinkt hsi one would have been different? The New Deal was sold as a way to recover to the pre 1929 condition,a nd relatively quickly. Despite growth, this did not happen. Its easy to have percentage GDP growth when you are starting with huge unemployed resources so that growth is simply utilizing these and not due to productivity gains (particuarly when much of this GDP is just busy work jobs from government that count as GDP but dont necessarily creat the equivelant amount in real market value). The fact remained that after a decade of intervention, unemploymetn was still in the double digits. This was not what FDR was advertizing he would do.

And yes in 1937, the budget was balanced, which if the keysian model is correct would have had an effect, but this is too simplistioc because many other things happened then as well. The Wagner Act came into effect, propping up union wages higher then the market value resulting in more layoffs, social security taxes came into effect, and required bank reserves increased, reducing the money supply.

Also, yes GDP increased in WWII, but virtually all of that went to war production and not the standard of living of Americans. Consumption per capita never reached its pre 1929 level until 1946. Furthermore, according to the keynsians at the time, they predicted a return to a depression after the war because government demand fell sharply unless there was new stimulus. Did we have that new major decline? There was no major government program after the war to make up the slack though we very quickly recovered back to growth.

The question that should be asked is whether stimulus spending shortened or lengthened the depression, not whether there was growth or not, because the baseline is that there would be growth anyway.

Very concise but complete analysis. I'm afraid your elegant argument will make little difference to Mach. His viewpoint is crystalized by his cursory reading of the topic and backed by casual observations (relying more on correlation than causality) and, despite his preoccupation with shouting down "right wing" ideology, his own very, firmly established opposing ideology. But, I certainly appreciated your response.

You are wrong. I at least appreciate EJ trying to use logic and facts instead of just yelling "SOCIALISM! SOCIALISM!" to make his point. Having said that, its time rip all of his arguments to shred.

"The New Deal was sold as a way to recover to the pre 1929 condition,a nd relatively quickly. Despite growth, this did not happen."

Well, it kinda did. Again, unemployment fell to 10% and if FDR didn't take his gas off the stimulus pedal he might have broke the Depression's back and restored sustainable growth. Also, none of FDR's stimulus programs were that dramatic in scope as measured by % of GDP. The current stimulus package, though inadequate, is going to do a much better job fighting the recession than FDR's plans.

"And yes in 1937, the budget was balanced, which if the keysian model is correct would have had an effect, but this is too simplistioc because many other things happened then as well. The Wagner Act came into effect, propping up union wages higher then the market value resulting in more layoffs, social security taxes came into effect, and required bank reserves increased, reducing the money supply."

The last one I'll agree with you definitely had a negative effect. The social security taxes thing is debatable. But what I wanted to focus on is your attack on unions and them supposedly propping up wages. This kind of is the central point of the conservative "FDR prolonged the Depression" argument. That if only wages were allowed to fall further everything would be fine and recovery would have commenced.

So, I ask..if its so easy why don't we just cut everyone's wages right now by 20%. That, according to you, should encourage companies to start hiring again. But in fact, the complete opposite is true. Falling wages simply feeds the deflationary spiral we are in. There is nothing good that comes from this.

The same argument can be made for taxes. There are no corporations sitting around now thinking "If only they cut the corporate tax rate by 5%, I would start building these huge factories" Its not the tax rate that's scaring companies right now, its fear, uncertainty and most directly, falling demand.

"Also, yes GDP increased in WWII, but virtually all of that went to war production and not the standard of living of Americans."

Well, DUHHH, there was a war going on. Plus there was rationing! So how on earth would you expect the standard of living to increase.

"Furthermore, according to the keynsians at the time, they predicted a return to a depression after the war because government demand fell sharply unless there was new stimulus. Did we have that new major decline?"

No, because once the rations were lifted, all of the pent up demand from a 0% unemployment economy took up the slack and has been carrying us up until now.

"The question that should be asked is whether stimulus spending shortened or lengthened the depression, not whether there was growth or not, because the baseline is that there would be growth anyway."

I completely disagree with the last statement you make. See Japan, whose stimulus packages, although numerous, were pathetic in size and who had no plan to fix the banking system. There was no growth at all.

With all that said Mach, how do you explain the country getting out of recession without government stimulus prior to 1930? It seems to me, if stimulus really is necessary for growth, then those recessions would have been as bad or worse than the Great Depression, so how come they weren't?

"So, I ask..if its so easy why don't we just cut everyone's wages right now by 20%. That, according to you, should encourage companies to start hiring again. But in fact, the complete opposite is true. Falling wages simply feeds the deflationary spiral we are in. There is nothing good that comes from this."

No one is saying the government should cut wages. The argument is that wages should be allowed to fall or rise according to the market, without government intervention.

One of my favorite quotes in this regard is in the Wikipedia entry for Grover Cleveland (in the section titled "Vetoes" -- emphasis mine):

After a drought had ruined crops in several Texas counties, Congress appropriated $10,000 to purchase seed grain for farmers there. Cleveland vetoed the expenditure. In his veto message, he espoused a theory of limited government: "I can find no warrant for such an appropriation in the Constitution; and I do not believe that the power and duty of the General Government ought to be extended to the relief of individual suffering which is in no manner properly related to the public service or benefit. A prevalent tendency to disregard the limited mission of this power and duty should, I think, be steadily resisted, to the end that the lesson should be constantly enforced that, though the people support the Government, the Government should not support the people."

Damn I love that quote.

================================And how things have changed...================================

Keep dreaming. TRILLION dollar Stimulus packages that don't will very quickly make everyone grasp why it was that they were putting up with the problems you speak of -- which is "conservatives that weren't".

Even "faux conservatives" are vastly more competent than "libtards without a clue".

> The economy recovered in 1946 because we helped rebuild Europe. Without that it is quite possible the economy could have languished much longer

Not likely. FDR was dead, so he couldn't promote more idiotic policies that would do so.

> LIES, LIES AND MORE LIES!!

Indeed, you title your comment correctly.

> During the years of WWII the US government ran deficits between 20-30% of GDP for several years. In comparison, this year we might reach a deficit of 15% of GDP.

As you said, "lies, lies, lies".

Carefully constructed ones, but lies, nonetheless.

The "lie" difference would be that there wasn't, then, already a vast lingering deficit already sucking up more than 10% of the budget with interest payments on said deficit. Something you know to be relevant -- In short, a lie of omission.

The other relevant factor you conveniently neglect to mention is that part of the problem --NOW-- is a lack of available credit.

With the Fed going out after so much credit, where, praytell, are any other seekers of credit (perhaps you've heard of them... they're called "BUSINESSES"?) going to find anything to build anything -- anything at all -- with?

> There is only 1 certainty and that is that eventually we will have to pay for it.

========WRONG!!!========

Eventually, our KIDS will have to pay for it...

A subtle difference, but very much one the politicians depend upon. THEY don't vote, even when they can.

One of the chief reasons I supported McCain, though he was not a much of a Republican, was that I figured that they might get people to think about the looming issues with SS ca. 2017, and start getting some of the possible "fixes" actually passed -- now, instead of waiting for another catastrophic failure.

No chance of touching that now. The Dems are still in th same sort of "What? What problem with SS?" mode that they were in regarding the financial markets until mid 2008.